Fears That Oil Traders Are Hoarding Oil On Tankers Is Moronic

Senator Bernie Sanders of Vermont unveiled legislation earlier this week intended to crack down on what he called, "manipulation and outright fraud" of the oil market by speculators.

Sanders is worried the rising price of oil has nothing to do with the supply and demand picture, and he wants something done about it.

Part of Sanders' legislation requires traders to disclose how much of their oil inventory is floating out at sea. While disclosure of this information would be useful, Sanders reason for wanting it-- he fears traders are hoarding the oil--makes no sense.

Vermont Biz: "These companies are hoarding heating oil right now, in the hope of selling it at a higher price this winter when senior citizens on fixed incomes and middle class Americans in cold-weather states need heating oil to stay warm," Sanders said.

Since the storage of oil in oversees tankers is not reported to the federal government, the practice already is distorting supplies and leading to unnecessarily high prices. "We cannot allow this to continue, especially when the firms that are taking advantage of this situation have received the largest taxpayer bailout in the history of the world," the senator said.

In his mind, the more oil that's sitting in the sea, the more likely investors are manipulating. In his world, a nefarious trader is snapping up oil and putting it out to sea, constraining supply, pushing the price of oil skywards. Once the price lifts, the trader rushes in with his barrels and scores a big fat profit.

Platts explains why he's wrong. The first problem is that there is no profit in holding on to heating oil right now. It's in backwardation, which means future contracts are below spot prices. The other problem is that oil's already been bought and sold. All that's going on is storage.

What Sanders seems to be alleging is that oil sitting on these tankers is all unsold. In industry parlance, the traders who own it are all taking naked long positions, a trade that benefits only if the price of oil rises. Spreads between months, the shape of the curve...in the Sanders' world, none of that exists.

But here's the thing: if a trader wants to do that, why on earth would he need to put oil on a ship? All he needs to do is buy a number of positions on the NYMEX, or other paper instruments, and hope that several months later, they will be worth more. In terms of exposure to a rising price, it's the same thing. But in reality, it's not the same thing; it's better. You don't need to charter a ship. You don't need to hire a crew. You don't need to pay the day-to-day costs for bobbing out on the ocean, called demurrage. Why would anybody do that if the plan consists solely of just riding a rising market higher?

Well, here's a possible guess as to what Sanders is thinking. The senator envisions a trader thinking: "I'll take this oil off the market, and the resulting tightness will make the price go higher, and I'll cash in that way." But any trader with half a brain knows that even taking a few tankers off the market for a period of time, in an oil economy that consumes 84 million barrels each and every day, is pointless. It would be the modern version of King Canute. Any trader with that sort of mindset either lost his job or a long time ago, or is well on his way to that occuring.

The proposal requiring disclosure of floating storage may indeed become law. But let's hope that the members of Congress who vote on it learn that the reasons for approving it have nothing to do with the allegations of the senator from Vermont.